A stronger-than-expected US labor market report for May calmed fears of an economic slowdown but unsettled financial markets, with Treasury yields surging, the dollar climbing and tech stocks pointing to steep losses.
Nonfarm payrolls rose by 172,000 last month, nearly double economists’ forecasts of 88,000, while private-sector employers added 120,000 jobs, also beating expectations.
The unemployment rate held steady at 4.3% and wage growth came in at 0.3% month-on-month and 3.4% year-on-year, in line with forecasts.
Market reaction was swift. The two-year Treasury yield rose nearly 10 basis points, the dollar led the G10 currency space and US equities pointed sharply lower, with tech bearing the brunt of the selloff.
Analysts said the report effectively neutralizes the case for near-term Fed rate cuts while stopping short of triggering expectations for hikes. The probability of a Fed increase by year-end remains below 40%, with steady wage growth suggesting the hiring rebound has not fed through to broader inflationary pressure.
The report nonetheless hands incoming Fed Chair Kevin Warsh a charged backdrop ahead of his first press conference following the June 17 FOMC meeting.
The role of artificial intelligence in reshaping labor markets also drew scrutiny. Financial sector employment has been declining since its peak in May 2025, and IT services employment is down 15,000 over the past twelve months, raising questions about whether AI-driven efficiencies are beginning to show up in headcount. “AI may eventually kill off jobs, but that time is not now,” said Jamie Cox, Managing Partner at Harris Financial Group.
“It’s also very difficult to remain anchored to a stagflation narrative when growth and employment are rising,”
Bill Adams, Chief US Economist at Fifth Third Commercial Bank, noted that payroll growth has averaged 114,000 jobs per month year-to-date, a sharp improvement over last year’s near-stagnant pace. “The tailwinds from fiscal and monetary policy, the AI boom, and an ebullient stock market are overpowering headwinds from the Iran War and higher energy prices,” he said.
The Iran war and Strait of Hormuz disruptions drew repeated mention as the most significant threat to the outlook. Adams warned that real average hourly earnings have already declined in each of the past two months and that a prolonged conflict would increasingly weigh on living costs and hiring demand.
A rotation out of technology and into value sectors was already underway Thursday, with financials, healthcare and real estate attracting buyers and the Dow Jones hitting a record high. “The momentum in this market has been impressive,” said Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, who cited a pipeline of highly anticipated IPOs as adding to investor enthusiasm despite lingering headwinds from valuations and inflation.
Adams offered a longer-term caution, warning that tightening labor supply driven by immigration restrictions and an aging workforce could itself become a constraint on growth and force the Fed’s hand on rates in the second half of 2026.
